McCLAIN v. OCTAGONPLAZA

Filed 1/31/08; reposted to provide correct title

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

APPEAL from a judgment of the Superior Court of Los Angeles County, Barbara M. Scheper, Judge. Affirmed in part, reversed in part and remanded.

Law Office of Joseph R. Brown and Joseph R. Brown, for Plaintiff and Appellant.

Law Offices of J. Steven Kennedy and J. Steven Kennedy, for Defendant and Respondent.

In appellant Kelly McClains action against respondent Octagon Plaza, LLC, (Octagon), the trial court sustained a demurrer without leave to amend to her claims for misrepresentation, breach of the covenant of good faith and fair dealing, and declaratory relief. Following a trial, the court concluded that she had failed to establish her remaining claims for violation of the Consumer Credit Reporting Agencies Act (Civ. Code, 1785.1 et seq.) (CCRAA) and an accounting. We affirm the rulings regarding the claims for breach of the covenant of good faith and fair dealing and violation of the CCRAA, and otherwise reverse.

RELEVANT FACTUAL AND PROCEDURAL BACKGROUND

McClain operates a business known as A+ Teaching Supplies. Ted and Wanda Charanian, who are married, are the principals of Octagon, which owns and manages a shopping center in Valencia. On February 28, 2003, McClain agreed to lease commercial space within the shopping center for a term of five years and two months, with an option to extend the lease for two additional five-year terms. The lease executed by the parties is a standard form agreement prepared by the American Industrial Real Estate Association, and is entitled, Standard Industrial/Commercial Multi-Tenant Lease Net. The tenant on the lease is identified as Kelly McClain dba A+ Teaching Supplies.

Paragraph 1.2(a) of the lease describes the size of the unit leased by McClain as approximately 2,624 square feet, and attached to the lease is a diagram of the shopping center that represents the size of the unit as 2,624 square feet. Paragraph 2.1 states: . . . Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. Paragraph 2.4 further provides: Lessee acknowledges that: (a) it has been advised by Lessor . . . to satisfy itself with respect to the condition of the Premises . . . , and their suitability for Lessees intended use, [and] (b) Lessee had made such investigation as its deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises . . . .

With qualifications not relevant here, Paragraph 1.5 of the lease obliges McClain to pay $3,804 per month as Base Rent. In addition, Paragraphs 1.6 and 4.1 require McClain to pay as additional rent 23 percent of the Common Area Operating Expenses (common expenses), which are defined in Paragraph 4.2 as costs incurred by Octagon for enumerated purposes relating to the ownership and operation of the shopping center. Paragraph 4.2 provides that McClains share of the common expenses is due no later than 10 days after Octagon provides her with a reasonably detailed statement of actual expenses. Paragraph 4.2 also permits Octagon, at its option, to estimate the common expenses for the upcoming calendar year and to require McClain to pay a prorated share of the estimate with her monthly base rent during the year. Under this option, Octagon is obliged to provide McClain with a reasonably detailed statement showing her share of the actual annual common expenses within 60 days after the end of the calendar year. If McClain underpays her share of the common expenses, she must pay the balance owing no later than 10 days after receiving the statement; if McClain overpays her share, she is to receive a credit against her share of the common expenses for the forthcoming year.

After a dispute arose concerning McClains share of the common expenses, she filed an action in small claims court, which was eventually transferred to superior court. The action was resolved by a settlement in November 2004.

On June 17, 2005, McClain initiated the underlying action against Octagon. After the trial court sustained a demurrer with leave to amend to the claims for misrepresentation and declaratory relief asserted in her complaint, McClain filed a first amended complaint (FAC), which contained claims for negligent or intentional misrepresentation, breach of the covenant of good faith and fair dealing, declaratory relief, violation of the CCRAA, and an accounting. Regarding the first three claims, the FAC alleged that the Charanians induced her to agree to pay excessive rent by intentionally or negligently misstating the size of her unit prior to the execution of the lease. The FAC further alleged that Octagon violated the CCRAA by improperly obtaining her credit report in March 2005. Finally, it sought an accounting and declaratory relief with respect to the statement that she received in February 2005 regarding her share of the common expenses for the 2004 calendar year.

On November 11, 2005, the trial court sustained Octagons demurrer to the first three claims, concluding that the lease, by its plain language, barred McClain from asserting the claims. Following a bench trial, the trial court determined that the Charanians had not violated the CCRAA in obtaining McClains credit report, and that McClain had no right to an accounting under the lease. Judgment in Octagons favor was entered on August 15, 2006.

DISCUSSION

McClain contends that the trial court erred in sustaining the demurrer without leave to amend and in denying her remaining claims after trial.

A. Demurrer

1. Standard of Review

Because a demurrer both tests the legal sufficiency of the complaint and involves the trial courts discretion, an appellate court employs two separate standards of review on appeal. [Citation.] . . . Appellate courts first review the complaint de novo to determine whether or not the . . . complaint alleges facts sufficient to state a cause of action under any legal theory, [citation], or in other words, to determine whether or not the trial court erroneously sustained the demurrer as a matter of law. [Citation.] (Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 879, fn. omitted.)

Second, if a trial court sustains a demurrer without leave to amend, appellate courts determine whether or not the plaintiff could amend the complaint to state a cause of action. [Citation.] (Cantu v. Resolution Trust Corp., supra, 4 Cal.App.4th at p. 879, fn. 9.)

Under the first standard of review, we examine the complaints factual allegations to determine whether they state a cause of action on any available legal theory. [Citation.] We treat the demurrer as admitting all material facts which were properly pleaded. [Citation.] However, we will not assume the truth of contentions, deductions, or conclusions of fact or law [citation], and we may disregard any allegations that are contrary to the law or to a fact of which judicial notice may be taken. [Citation.] (Ellenberger v. Espinosa (1994) 30 Cal.App.4th 943, 947.) If a proper ground for sustaining the demurrer exists, this court will . . . affirm the demurrers even if the trial court relied on an improper ground, whether or not the defendants asserted the proper ground in the trial court. [Citation.] (Cantuv.Resolution Trust Corp., supra, 4 Cal.App.4th at p. 880, fn. 10.)

Under the second standard of review, the burden falls upon the plaintiff to show what facts he or she could plead to cure the existing defects in the complaint. (Cantu v. Resolution Trust Corp., supra, 4 Cal.App.4th at p. 890.) To meet this burden, a plaintiff must submit a proposed amended complaint or, on appeal, enumerate the facts and demonstrate how those facts establish a cause of action. (Ibid.)

2. Misrepresentation

McClain contends that the FAC adequately alleges a claim for fraud in the inducement, that is, misrepresentation involving a contract in which the promisor knows what he or she is signing but consent is induced by fraud. (1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, 297, p. 324, italics omitted.) We agree. Generally, [t]he elements of fraud, which give[] rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or scienter); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage. [Citation.] (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 173.) Claims for negligent misrepresentation deviate from this set of elements. The tort of negligent misrepresentation does not require scienter or intent to defraud. [Citation.] It encompasses [t]he assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true [citation], and [t]he positive assertion, in a manner not warranted by the information of the person making it, of

that which is not true, though he believes it to be true [citations]. (Id. at pp. 173-174.)[1]

Regarding the fraud claim, the FAC alleges the following facts: In January 2003, when McClain investigated leasing space in the shopping center, Octagon informed her that the unit in which she was interested comprised exactly 2,624 square feet. Because the base rent in the shopping center was $1.45 per square foot per month, McClains total base rent would be $3,804 per month. Moreover, because the unit occupied 23 percent of the shopping center, McClain would be responsible for this share of the common expenses.

Prior to entering into the lease, McClain attempted to confirm the size of the unit. The Charanians, who purported to be offended by her inquiries, responded that measuring the area would be unreasonably costly due to the units unusual angles. They insisted that they had intimate knowledge of every detail of the shopping center, and that McClain could rely on their representations regarding the sizes of the unit and the shopping center. Due to the Charanians pretense that they were offended by her request to confirm the size of the unit and their repeated assurances that McClain could rely on their honesty and accuracy, McClain was induced to accept their representations, and she placed reasonable reliance upon the representations in executing the lease.

The Charanians knew, or had reason to know, that the representations were materially inaccurate. In early 2005, McClain obtained a copy of Octagons application for earthquake insurance, which disclosed that the correct size of the shopping center was 12,800 square feet, rather than the 11,835 square feet the Charanians had used in calculating McClains share of the common expenses. Upon investigation, she also discovered that her unit occupied approximately 2,438 square feet, rather than the 2,624 square feet represented. Had she known the correct sizes, she would not have agreed to the base rent and share of the common expenses stated in the lease. Under the agreed-upon rental rate of $1.45 per square foot, the base rent for the unit should have been $3,535.10 per month, rather than $3,804, as recited in the lease; moreover, McClain should have been allocated 19 percent of the common expenses, rather than the 23 percent share that she accepted under the lease. As a result of Octagons misrepresentations, she was induced to enter into a lease that obliged her to pay excess rent of more than $90,000 over the term of the lease.

These allegations, considered in isolation, are sufficient to establish the elements of a claim for intentional or negligent misrepresentation. In OHara v. Western Seven Trees Corp. (1977) 75 Cal.App.3d 798, 804-806, a tenant asserted a fraud claim against her landlord, alleging that the landlord induced her to rent an apartment by misrepresenting the existence of security measures in the building, and that she suffered injuries as a result of the absence of these measures. The court held that the fraud claim was adequately pleaded, reasoning that [s]ince [the tenant] did not know the true facts and since [the landlord] had superior knowledge, the allegations, if proved, would support a finding of justifiable reliance. (Id. at p. 805.) We reach the same conclusion here.

The key issue, therefore, is whether the terms of the lease rendered

McClains fraud claim untenable.[2] Section 1668 of the Civil Code provides that [a]ll contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, . . . whether willful or negligent, are against the policy of the law. This provision encompasses intentional and negligent misrepresentation. (Blankenheim v. E. F. Hutton & Co. (1990) 217 Cal.App.3d 1463, 1471-1473.) Accordingly, as Witkin explains: A party to a contract who has been guilty of fraud in its inducement cannot absolve himself or herself from the effects of his or her fraud by any stipulation in the contract, either that no representations have been made, or that any right that might be grounded upon them is waived. Such a stipulation or waiver will be ignored, and parol evidence of misrepresentations will be admitted, for the reason that fraud renders the whole agreement voidable, including the waiver provision. (1 Witkin, Summary of Cal. Law, supra, Contracts, 304, p. 330.)

Under these principles, California courts have concluded that a variety of contract terms neither bar fraud claims nor establish as a matter of law that reliance upon the defendants misrepresentations was unjustifiable. (See Hinesley v. OakshadeTownCenter (2005) 135 Cal.App.4th 289, 300-302 (Hinesley), and cases cited therein.) For example, in Hinesley, the plaintiff asserted a fraud claim against his landlord, alleging that when he leased commercial space in a shopping center, the landlords agent told him that other units in the shopping center would be occupied by businesses likely to attract heavy foot traffic. (Id. at p. 292.) The lease in question contained a provision that expressly accorded the landlord the exclusive right to select other tenants, and recited that the plaintiff had not relied on any representation regarding other tenants. (Id. at p. 297.) After the landlord obtained summary judgment on the plaintiffs claims, the court in Hinesley determined that the lease provision could not by itself absolve the landlord of liability for fraud. (Id. at pp. 300-302.) In addition, the court reasoned that the provision did not, as a matter of law, preclude a finding of justifiable reliance, and that its presence in the lease was merely a factor to be considered in the determination of justifiable reliance. (Id. at pp. 301-302.) The court nonetheless affirmed summary judgment, concluding that the evidence, viewed in its entirety, established that the plaintiff had not placed reasonable reliance on the agents misrepresentations. (Id. at pp. 302-304.)

It is well established that the kind of disclaimer in Paragraph 2.4, which asserts that McClain had an adequate opportunity to examine the leased unit, does not insulate Octagon from liability for fraud or prevent McClain from demonstrating justified reliance on the Charanians representations. (City of Salinas v. Souza & McCue Construction Co. (1967) 66 Cal.2d 217, 224-225, disapproved on another ground in Helfend v. Southern Cal. Rapid Transit Dist. (1970) 2 Cal.3d 1, 14 [term in construction agreement requiring contractor to examine project site does not preclude fraud claim or establish unjustified reliance]; Simmons v. Ratterree Land Co. (1932) 217 Cal. 201, 203-204 [provision in real estate contract that buyer had investigated property and relied only on representations in contract did not protect seller from liability for fraud]; Crawford v. Nastos (1960) 182 Cal.App.2d 659, 665-666 [provision in real estate contract that buyer had inspected well and accepted it as is did not insulate seller for liability for damages from fraud]; Smith v. Rickards (1957) 149 Cal.App.2d 648, 653-654 [contract term stating that buyer had inspected business and was familiar with its location and condition did not bar fraud claim].) Accordingly, the focus of our inquiry is Paragraph 2.1, which asserts that any statement of size in the lease or used to calculate rent is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less.

In our view, this provision does not insulate Octagon from liability for fraud or establish that McClains reliance on the Charanians alleged misrepresentations was unjustifiable as a matter of law. Our view is informed by our Supreme Courts decision in E. H. Morrill Co. v. State of California (1967) 65 Cal.2d 787, 794 (E. H. Morrill Co.). There, a contractor entered into a construction agreement to build a facility for the State of California. The agreement described the subsurface composition of the building site, but recited that the description contained approximations; in addition, it obliged the contractor to make its own investigation. (Id. at pp. 789-790.) The agreement further provided that the description was confined to the actual results of the States investigation and was only included for the convenience of bidders; that the States investigation of subsurface conditions had been made only for the purpose of design; and that the inclusion of the description in the agreement did not relieve the contractor of its obligation to make its own investigation. (Id. at pp. 790-791.) Notwithstanding the disclaimers and exculpatory terms of the agreement, the court concluded that the description constituted a positive assertion of fact which could support a claim for fraudulent misrepresentation. (Id. at pp. 791-792.) It added: The contention . . . that an allegation of justifiable reliance on such representations is precluded as a matter of law because of [the disclaimers and exculpatory terms] . . . is . . . untenable. (Id. at p. 794.)

Here, the Charanians alleged pre-contractual figures for the units size and McClains share of the common expenses -- respectively, 2,624 square feet and 23 percent -- were repeated (with qualifying language) in the lease. In view of the similarity between the lease and the agreement in E. H. Morrill Co., we conclude that the terms of the lease -- including the exculpatory provisions in Paragraph 2.1 -- do not bar McClain from asserting her fraud claim or showing that the misrepresentations reasonably induced her to accept the lease.

This conclusion finds additional support in Furla v. Jon Douglas Co. (1998) 65 Cal.App.4th 1069 (Furla). There, a homeowner and his brokers represented in a listing service and elsewhere that the house the owner was attempting to sell was 5,500 square feet. (Id. at pp. 1072-1075.) The buyers sales agreement with the owner provided in paragraph 18F: Buyer is . . . aware that Broker makes no representations with respect to . . . square footage of the subject lot or the improvements thereon. Information, if any, on square footage provided in [the listing service] . . . and information materials concerning the Property are approximations only. By obtaining a survey of the Property or having a professional appraiser measure the Property, Buyer may verify . . . square footage. (Id. at p. 1079.) Following the sale, the buyer discovered the house was only 4,300 square feet, and initiated an action for fraud and rescission. (Id. at p. 1072.) The trial court granted summary judgment in favor of the owner and his brokers, reasoning, inter alia, that the owner could not establish reasonable reliance on the defendants representations. (Ibid.)

On appeal, the owner and brokers did not assert that paragraph 18F operated as an exculpatory clause, but contended that it established that the buyers reliance on the pre-sale representations of size was unreasonable because he was on notice that they were approximations only. (Furla, supra, 65 Cal.App.4th at p. 1080.) In reversing the summary judgment, we rejected this contention: Assuming that paragraph 18F put [the buyer] on notice that prior statements of square footage were approximations only, it is still a question of fact for a trier of fact whether [the buyer] reasonably relied upon defendants approximations. Defendants assume that if their prior estimates of square footage are treated as approximations, defendants cannot be liable. . . .  But according to [the buyers] theory of the case, the estimate of 5,500 square feet was not merely inaccurate, it was grossly inaccurate, by more than 20 percent. Defendants own citation of a dictionary definition of approximate includes near to; about; a little more or less; close. The alleged error here was not de minimis, and cannot be ignored. We cannot say that no reasonable jury could conclude that an approximation of square footage which is wildly exaggerated amounts to an actionable misrepresentation of fact. (Furla, supra, 65 Cal.App.4th at p. 1080.)

Here, McClain alleges that the Charanians exaggerated the size of her unit by 186 square feet, or 7.6 percent of its actual size, and increased her share of the common expenses by 4 percent through a calculation that understated the size of the shopping center by 965 square feet, or 8.1 percent of its actual size. Although these discrepancies are smaller than those at issue in Furla, they cannot be regarded as de minimis or necessarily near to the actual sizes as a matter of law. As alleged in the complaint, they operated to increase the rental payments incurred by McClains retail business by more than $90,000 over the term of the lease. In view of Furla, the fact that Paragraph 2.1 put McClain on notice that the Charanians representations of size were approximations does not preclude her from showing that they were, in fact, materially and unreasonably inaccurate.[3]

In an apparent effort to distinguish Furla, Octagon argues that Paragraph 2.1 not only uses the term approximation, but states (1) that the parties agreed the approximations were reasonable and (2) that McClains rent was not subject to revision regardless of the actual sizes. These clauses do not aid Octagon. As to element (1), a stipulation intended to bar a partys fraud claims does not bind the party, and thus the insertion of language agreeing that a material misrepresentation is reasonable is of no effect. (1 Witkin, Summary of Cal. Law, supra, Contracts,  303, p. 330.) If, as McClain asserts, the Charanians assured her that the square footage represented was accurate and dissuaded her from taking her own measurements, any agreement that the measurement set forth in the lease was reasonable reflects nothing more than a belief induced by such misrepresentations.

Similarly, to the extent element (2) purports to insulate Octagon from liability for any discrepancy -- no matter how great -- between the actual square footage and that represented in the lease, it is akin to an as is clause. California courts have routinely rejected such clauses as ineffective in insulating a contracting party from fraud claims regarding nonobvious defects in goods. (See, e.g., Orlando v. Berkeley (1963) 220 Cal.App.2d 224, 228-229 [contractual clause that provides, Buyer agrees to waive termite clearance and to absolve seller of any warranty, accepting house AS IS does not bar claim for concealment of termite infestation in house].) In sum, the trial court erred in sustaining the demurrer with respect to McClains misrepresentation claim.

3. Breach of the Implied Covenant of Good Faith and Fair Dealing

We reach the contrary conclusion regarding McClains related claim for breach of the implied covenant. Generally, every contract, including commercial leases, imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement. [Citation.] (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 371-372, quoting Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683-684.)

Regarding this claim, the FAC alleges that Octagon breached the implied covenant by negotiating with McClain for the rental of the Premises on a per-square foot basis and then intentionally, or negligently, overstating the true size of the Premises. The net result of the foregoing was that Octagon pulled a bait & switch on McClain in that Octagon negotiated a per-square foot price for the Premises and then inserted only its fraudulently derived amount for the base rent as the purported final agreement between the parties in the Lease. The net result was that Octagon intentionally deprived McClain of the benefit of her bargain by surreptitiously charging her a rental rate which was far in excess of the mutually negotiated price. (Italics omitted.)

Story continues as Part II ..

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[1] Under California law, a defrauded party to a contract may elect to rescind the contract and seek restitution, or stand on the contract and recover damages arising from the fraud. (5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts,  827-829, pp. 1200-1202.) Here, the FAC seeks damages rather than rescission of the lease.

[2] Because the lease constitutes the foundation of the fraud claim and is incorporated into the FAC, the trial court properly examined the lease in assessing whether the claim is legally tenable. (4 Witkin, Cal. Procedure (4th ed. 1997) Pleading, 390-391, pp. 487-488.)

[3] During oral argument, Octagons counsel suggested that the term approximation in Paragraph 2.1 gave any prospective lessee notice that no firm or actionable representations about size were made in the lease. However, the question is not whether the term puts a prospective lessee on notice that the stated size may not be precisely accurate. It does. The question is whether it necessarily renders any deviation from the stated size immaterial. It does not. Where, as here, the deviations cannot be said to be immaterial as a matter of law, the use of the term approximation cannot insulate a lessor from potential liability for misrepresentations about size.

Octagons counsel also suggested that because the FAC alleged that McClain had been assured the square footage figures used in the lease were exact, the contracts approximation language necessarily put her on notice of a discrepancy she should have pursued. This may well be relevant to McClains demonstration of reasonable reliance, but it does not bar her claim as a matter of law. (See Hinesley v. Oakshade Town Center, supra, 135 Cal.App.4th at p. 301 [lease clause providing that tenant was not relying on existence of other tenants was relevant in determining whether tenants alleged reliance on agents representations of existing tenants was reasonable: [T]he rule that this kind of contract provision does not, as a matter of law, preclude a finding of fraud does not mean the contract provision is in every case irrelevant.].)